8.8.09

The bunny is Not Amused.

After vigilantly upholding his one principle prohibiting the Three P's in this blog (porn, profanity, and politics), he has been forced to break his own rule.

The instigator: the United States Congress.

The bunny has had enough.

Hypocrisy, it must be said, has been part of the politician's makeup for so long now that it is widely taken for granted, nay, even expected by voters who re-elect the swine term after term (while the Founding Fathers were clear on presidential term limits, the bunny concludes that when it came to Congressional ones, they must have all been too busy campaigning for re-election to write in this most crucial of clauses).

But on this sunny Saturday, when the bunny was looking forward to a day of tending to his coat and crunching intermittently on raw almonds, he was so shocked and awed to open the morning papers and see such an avalanche of Congressional duplicity he just had to blog about it.

Exhibit A is the tooth-gnashing tour brochure of a ten-member Congressional New Year's lurch around the world to study climate change (four with their spouses in tow) on an Air Force C-130 modified with rockets and skis to handle the load and terrain. The cost to taxpayers? A paltry $103K. That, at least, was the figure reported by those intrepid lawmaker/explorers. The actual cost, according to the Defense Department (which is somewhat more versed in the real-time costs of keeping combat aircraft flying), topped $500K. (This according to "an analysis piecing together the specifics of the excursion"--the piecers of today's missive being Brody Mullins and T.W. Farnam of the WSJ).

This occurs in the same issue (three pages later, above the fold, also with Mullins sharing the byline) as Exhibit B, the grousing of that selfsame Defense Department which was fingered for the purchase of eight passenger jets which (shockingly) the DoD said it neither needed nor wanted. Lawmakers cut back with a volley of statistics showing military usage (with perhaps one faulty round in the chamber, since according to their own data they themselves use the jets 14.5% of the time). Total cost: $550 million. That should've been covered by the termination of future orders for F-22 fighter jets, except that (aw, shucks!) funds were allocated for an engine redesign for the forthcoming F-35. Total cost: $560 million. Never mind that this more than doubles the original presidential request for four of the jets, including two currently under lease from the Air Force (at a comparative cost of $220 million). Never mind that this comes on top of the $485 million revival of a contract for a presidential helicopter already shunned by the White House for its absurd cost creep, which has already surpassed that of the 747 jumbo jet known as Air Force One (see posting 3.25.09).

This comes a mere three days after Exhibit C, which the bunny came across online after seeing a a CNBC headline he just couldn't pass up ("Stimulus Spending Fails to Follow Unemployment, Poverty", 8.5.09). According to ProPublica ("an independent, non-profit newsroom that produces investigative journalism in the public interest" according to CNBC--how's that for a lede?), the $787 billion stimulus package passed at the beginning of the year (which the president had to admonish Congress to bring down below $800 billion from over $900 billion in its original--Capitol--form before he would sign it) has blown all over the map without rhyme or reason, ignoring some of the hardest-hit states while showering money on others less impacted by the financial crisis. The ProPublica survey goes down to the county level--you can view it at http://projects/propublica.org/recovery.

Never mind that Congress has cashed in on public outrage over executive excess and blundering to make itself the public pillory of any corporate executive that will get a legislator's face on camera. Never mind that nonstop Congressional grandstanding about corporate financial excess belies the greatest increase in government spending since WWII. Never mind that after endless on-air harangues about the financial abuses of corporate America, the highest body of lawmakers in the land is voting to give itself more private planes (hey, c'mon, the military needs more airborne swivel chairs!) months after taking the titans of Detroit over the coals for their private jets (and for whom they just kicked out another $2 billion in car subsidies before conveniently going on vacation).

Hypocrisy, thy name is congressman.

Bunny Bombs Away:

"Lawmakers' Global-Warming Trip Hit Tourist Hot Spots" by Brody Mullins and T.W. Farnam, Wall Street Journal (8/8/09)

"Pentagon Takes Aim at Jets for Congressional Travel" by Brody Mullins and August Cole, Wall Street Journal (8/8/09)

"Hair of the Dog" by Alan Abelson, Barron's (8/8/09)

"Stimulus Spending Fails to Follow Unemployment, Poverty", CNBC.com (8/5/09)/"How Much Stimulus Funding is Going to Your County?" by Michael Grabell, Jennifer LaFleur, Dan Nguyen, and Jeff Larsen, ProPublica.org/recovery (8/5/09--source claims data current as of 7/20/09)

Singer, P.W. Wired For War: The Robotics Revolution and Conflict in the 21st Century. New York: Penguin Press, 2009.

3.25.09

Never before has the future been so now.

Just when the bunny was all set to resuscitate his blog with an excoriation of the times in which we find ourselves mired (apologies for the long sabbatical, but he’s been working on a book), along comes Wired for War (Penguin Press), a look at military robotics by think tanker P.W. Singer (Children at War) of ye olde Brookings Institution down in D.C.

After such saturation coverage of the Great Unwinding Redux, the bunny welcomed the opportunity to delve into a field which has quietly burgeoned into a stealth growth industry.

How much so, Joe? queried the bunny by phone. “Some numbers that illustrate this massive growth are the US going into Iraq with a handful of drones [UAVs] in’03,” claimed the author. “We now have over 7,000 drones in the inventory. On the ground, we utilized zero robots during the invasion in ’03. We now have more than 12,000.” The bunny was particularly surprised to hear of ground applications for unmanned systems, to the extent that concerned companies contracted are tasked even to provide robot “hospitals” for their products which bear the brunt of unfriendly fire. Take Foster-Miller, manufacturer of the Talon, a tracked robot with an articulated arm that first saw service sifting through rubble at Ground Zero following the 9/11 attacks. According to the author, the Iraqi theater alone accounts for nearly $500 million in robot and repair contracts: “Foster-Miller’s got a $20 million contract to run a repair yard for robots, a robot hospital, in Baghdad.” This facility, he claimed, repairs 50-60 Talons per month (of an approximated 2,000 units in service). Or consider General Atomics, which makes the headline-grabbing Predator UAV, as well as its heavier-armed progeny, the Reaper.

Being that the bunny is both burrower and prey animal, he is not overfond of the proliferation of machines that can fly (or roll, or swim) for lengthy periods, equipped with high-resolution sensors which can spot a burrow from low geosynchronous orbit, and which in some cases are even equipped with “smart” munitions capable of hitting a yard-wide target from miles away with an accuracy measureable in inches. No, the bunny doesn’t care for such developments one bit.

However, taking the long view as he does, he cannot help but marvel at the rapid growth of humanity’s dependence upon its lethal new creations, especially given the age-old phobia of artificial intelligence gone amok. When and how did the pendulum swing?

Ah, the Sixties.

“The industry really takes off in the 1960s, where you start seeing factory line work being done by robots,” Singer explained to your leery lagomorphic reporter. “When you move into the realm of war, the industry predated 9/11, but as companies in the marketplace describe, it was very much a matter of trying to ‘push’ it onto the customer, the customer being the Pentagon. After 9/11, it becomes a ‘pull’ environment. It goes from their phone calls aren’t answered, they won’t endorse, the doors won’t open, to being told after 9/11 to ‘make them as fast as you can.’”

Naturally, the rise of robotics (as opposed to AI, the industry’s more cognitive but less operational offshoot) runs parallel to humanity’s ever-increasing dependence on computers. Military applications for unmanned systems are a logical (and cost-effective) extrapolation of this trend, particularly with increased miniaturization of wireless handheld computers. (Consider Vcom3D Inc.’s Vcommunicator system employed by the US Army in both the Iraq and Afghan theatres, which is an iPod-based translator designed to provide troops with appropriate speech and gestures in unfamiliar locales.) If necessity is the mother of invention, war is one big mother: “Most analysts I spoke with told me the robotics industry now is akin to where the auto industry was circa 1908,” Singer said. “In that year, Ford sold just under 300 Model T’s. With the spurring effect of WWI, by 1918 they were selling almost a million a year.”

Since the funding for most robotics R&D is military-based, sooner or later the government gets involved, which would make any bunny flatten its ears with derision. Consider the wayward VH-71 Kestrel, the new presidential helicopter designated to replace Marine One (built by a team of manufacturers led by Lockheed-Martin). Due to a pileup of add-ons and delays, the president’s new chopper is now more expensive than the 747 used as Air Force One (“This is something Obama will probably cut,” Singer claimed flatly). This is an example of the phenomenon known as “requirements creep”, a neat little fungus in the moist, fetid environment of human bureaucracy. “It starts out with the client [the Pentagon] asking for a system but not knowing exactly what it wants in that system, be it because it hasn’t worked out the right concept for its operation, or because the people making the decisions don’t actually understand the technology they’re buying,” Singer explained. “They often give a somewhat vague or incomplete contract out. Companies take that contract and soon after the Pentagon comes back and says, ‘We said we wanted X, but now we want X+2, or X and Y.’ The company says it’ll cost more, but they’re happy to do it. So you get this back-and-forth where the original idea and estimate is nothing like what you ultimately get.”

But that’s the manned world, and the unmanned one which Singer is so interested in seems to already be outstripping its skin-and-bones creators. It’s happening so fast, Singer says, that it’s bending the very notion of what war is and what it means to fight it. “For 5000 years the idea of going to war meant, to use my grandfather’s experience in WWII, he went to a place of such danger that the family didn’t think he’d come home again. Compare that to a Predator drone pilot. Their experience of going to war against insurgents in Iraq or Afghanistan had them not leaving Nevada. Had them waking up in the morning, getting into work, spending twelve hours putting missiles on targets, then getting back in their car, and twenty minutes after being at war, being at the dinner table with their kids talking about their homework.”

Great googly-moogly.


Bunny bridges to nowhere:

"The Downside of Letting Robots Do the Bombing" by Mark Mazetti, New York Times, 3/22

“Intel, Lockheed Tell Obama on Taxes, Not In This Economy” by Mark Drajem and Holly Rosenkrantz, Bloomberg.com, 3/17

“iPods On The Frontlines” by Patrick Durkin, Tactical Weapons, 5/09 (p.34)

“In The Line Of Fire: Why America’s defence industry is in for some lean years”, The Economist, 3/21 (p.70)

4.6.08

The bunny is having one of those existential moments we've all had, when you wonder if you are insane, or if the rest of the world is.

He cannot fathom the relentless optimism surfing the tsunami of bad news. Talk about "irrational exuberance"--and the former Fed chief who coined that phrase himself went on the record stating there's better than a 50/50 chance the country could be in a recession, though of course that hasn't happened yet despite rising unemployment (from 4.8% to 5.1%), the dollar falling to a 12.5-year low, declining factory orders (1.3% in February, after 2.3% in January), a record national housing slump (too much source coverage to list), continuing acute credit-market constipation (ditto), a 30% jump in bankruptcy filings in March alone,and a financial industry so full of holes its notorious opacity has been thinned to a gossamer translucence.

Take, for example, the Dow's spike this past week on the news that UBS would take an additional $19 billion in writedowns (for a titillating total of $37 billion in losses), or that Lehman Brothers--which Wall Street sharpies have been betting is the next investment banking horse to lose, be shot and processed into dog food--will have to raise an additional $4 billion in capital because, y'know, just in case. This was interpreted as Good News because (so the rationale goes) these writedowns take us past the halfway point of the estimated $1.2 trillion global credit loss, roughly $460 billion of which will be sustained by "leveraged" US financial institutions (so sayeth the anonymous economists of Goldman Sachs, according to equally anonymous journalists at Reuters), and therefore, there's nowhere to go but Up.

This is about the time the bunny puts his head in his paws and emits a world-weary sigh through his fuzzy black nostrils. (As with all members of the Checkered Giant breed, the bunny's face bears the singular mask of black over the snout, eyes and ears. Closer inspection reveals natural brindle highlights--no Sun-In for this bunny.)

Such financial psychosis, the bunny concedes, may be in part a reflex reaction to the torrent of terror following the Bear Stearns debacle, arguably the industry's worst trauma since 9/11 (or, even more arguably, the industry's very own 9/11). But it seems to carry the seeds of its own perpetuation by policy. The bunny cites Andrew Bary's excellent article in yesterday's Barron's ("Wall Street's Latest Illusion", p.40), which illustrates the alchemy by which tottering financial firms turn their losses into profits on their books. Abracadabra:

"Here's how the accounting works: When a company's credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value."

Got that? If not, here's the bunny's breakdown. Let's say you're an investment bank. You issue a ten-year bond with a maturity value of one thousand smackeroos. Two years on, the bond's market value drops to $800 due to reduced demand. You know you're still getting the full grand eight years out, so you book the loss as anticipated profit. This is not only legal, it's common practice, or, as one of Bary's sources sums up, "a natural consequence of fair-value accounting." As Bary himself notes:

"Lehman, for instance, reported earnings in its most recent quarter of 81 cents a share, above the consensus estimate of 70 cents. However, the $600 million gain from the reduced value of its liabilities essentially added about $400 million, or about 70 cents a share after taxes. Excluding that gain, Lehman's profits would have been below the consensus."

If that sort of financial wizardry sends a distinct shiver of discomfort up your spine, you're not alone. The bunny thinks this practice is but one of a whole spread of torpedoes fast closing on the carrier which has slowed to recover planes. Get clear, greedy bipeds, he warns. Get airborne and get clear before it's too late.


Bunny ballast:

"Wall Street's Latest Illusion" by Andrew Bary, Barron's, 4/7/08

"The Dollar and the Credit Crunch" by Ronald McKinnon, Wall Street Journal, 3/31/08

"Soros Sees Additional Market Declines After Reprieve" (update 1) by Katherine Burton, Bloomberg.com, 4/3/08

"After Meltdown, Dollar May See Some Relief" by Gertrude Chavez-Dreyfus, Reuters, 3/14/08

"Muni Losses May Put Taxpayers on Hook for $7 Billion" (update 2) by Martin Z. Braun and Jeremy R. Cooke, Bloomberg.com, 4/3/08

"US Sees Biggest Jobs Drop in 5 Years as Downturn Spreads" by Kelly Evans, Kris Maher and Timothy Aeppel, Wall Street Journal, 4/5/08

"Bankruptcies Jump 30% in March, Led by Housing-Bust States" by Bill Rochelle and Bob Willis, Bloomberg.com, 4/5/08

"Pushovers at the Fed", editorial, Wall Street Journal, 3/25/08

"To See a Stock Market Bubble Bursting, Look at Shanghai" by David Barboza, nytimes.com, 4/2/08

"Goldman sees $1.2 trillion global credit loss", Reuters, 3/25/08

"Factory Orders in US Decline More Than Forecast" by Bob Willis, Bloomberg.com, 4/2/08

3.30.08

Today the bunny is pleased to welcome Colin Harrison, author of six novels, including The Finder, which will be published by Farrar, Straus & Giroux on 10 April. Mr. Harrison is also a senior editor at Scribner, a division of Simon & Schuster (itself a division of Viacom). The bunny thinks that makes him an excellent candidate to question about the book publishing industry, since he has the view from both sides of the desk.

The Bunny Papers: Where is the publishing industry now?

Colin Harrison: As a writer and as an editor, I am bullish on the future of books, for the foreseeable future. Call it 10, 15, 20 years. After that, who knows, we’ll all be reading books on the inside of our eyelids. I’m not worried about the book business. Now, it’s true, the book business has big challenges, but those challenges are well-known. People like books, they like to feel books, they like throwing them into their bags.

TBP: So people still like to read. But will they read in print or on screen?

CH:I have a broad theoretical answer to that. My theory is that content in its short form has lost almost all its market value. Once upon a time, if you wanted to have stock prices that were pretty current, you needed to pay $11K to have a little box on your desk. Now it’s free. 20 minutes delayed, but free. There are a bunch of newspapers now you don’t have to subscribe to, because they’re free. People will download short films, but will still go to movie theaters for feature-length films. I think the structural pressure is on magazines and newspapers. The way this is maybe going to be solved is with these new electronic readers. But I say "maybe". With an electronic box, people drop it on the pavement, it might break. When it comes to books, the culture still celebrates books as a fetish item. Books are still something people collect. One of my pet phrases is, "There’s nothing like a book."

TBP: There's nothing like the consignment model of returns, which the industry has been running on since the Depression, either.

CH:The book business still sells newly-printed books published 50 or 75 years ago or more. You don’t see the same parallel in the auto industry. Books don’t have the same kind of obsolescence curve other consumer items do.

TBP: Have you ever worked in sewage?

CH: No. I just thought it was an intriguing way to kill somebody.

(Author photo by Joyce Ravid)

3.23.08

The bunny is in a reflective frame of mind these days. In particular, he's been thinking of 1981 and 1982, and how they might be seen as offering a premonition of the current morass.

No, it wasn't Reaganomics, or crack cocaine. It wasn't Ultravox or AIDS, Swatch watches or masses of black rubber bracelets. These were the years that saw the theatrical releases of The Road Warrior, Escape from New York, and Blade Runner, seminal filmic visions of the full-throttle progress of modernity smashing head-on into the retaining wall of dystopia. The bunny wonders if David Bowie, who preceded this mood of celluloid Da-Sein himself, on vinyl, by a good decade, saw any of these movies, and what he made of them. Come to think of it, he wonders the same about Fritz Lang, Adam Smith, Thomas Malthus, and Aristotle. But that could just be all the blueberries he scarfed for breakfast going to his head.

Towards the point: the bunny sees this cute little crevice of doomsday augury (replete with some choice rides!) as perhaps offering a metaphorical prism through which to view a trend that was actually going on, though not in those years specifically (the bunny likes to truncate time, it's one of his few indulgences, humor him). To wit: the shift in mentality that seemed to occur as more and more financial houses went public. Again, it's not specific to 1981-82. It's not some sort of averaging of dates, not with the staggered IPOs of Merrill Lynch (1971), Bear Stearns (1985), Lehman Brothers (1994) or Goldman Sachs (1999). Remember, we are in the realm of allegory, not algorithm.

What has transpired since the start of the 1980s is not merely the longest bull market in (US) financial history, but also a transformation, nay, transmogrification, of the financial mindset from one of thrift, efficiency and self-sustainability to the firebombed casino before you today. And that, the bunny believes, is because the industry became a game of Playing With Other Peoples' Money.

The bunny can already hear the nay-sayers out there, braying about transparency and responsibility to shareholders. And what, the bunny would retort with a wry whisker twitch, would they make of the Bear Stearns debacle? What did they make of Alan Schwartz desperately saying anything he could to prevent a Pamplona-style run on the bank, while Jimmy Cayne and Warren Spector played bridge as Bear burned? For that matter, what did they make of Credit Suisse CEO Walter Kieholz mugging for the TV crews in Davos saying they didn't have large fourth-quarter write-downs, followed by sf2.86 billion in losses due to "trading improprieties" not two months later?

This, the bunny believes, is a classic case of oversophistication. Put too many people into too many dollars NOT THEIR OWN and promise them astronomical bonuses based on performance (you don't think the shareholders in investment banks, even solvent ones, get paid first, do yez?), and you will get Uncontrolled Investment Diversification Mitosis, the technical term for which is Greed. And greed, as all bunnies know, metastasizes.

This oversophistication is a direct result of financial sharpies constantly dreaming up new ways to make money, which is a lot easier to do when you're not gambling with your own. Let it go long enough and you get an unraveling of the whole gesamkunstwerk (yes, the bunny knows German), which then prompts government regulators to get involved, who are guaranteed to screw things up further, thus leading to the sort of meltdown depicted in the three films named at the top of this rant. Oversophistication, cheap money, SOMEONE ELSE'S MONEY, and human greed led humanity down this road.

The bunny sincerely hopes the bipeds can sort things out amongst themselves. A bit of self-restraint, doncha know. The bunny is a prey animal. He has no self-imposed delusions of morality as humans do. His concerns are to eat without being eaten, and to find enough does to sire his kittens before meeting up with the Black Rabbit of Death. His kind have been at this a long time (90 million years, give or take, and still counting!). He knows about survival. He hopes the banks and brokerages that made this mess will have the instincts to pull themselves--and the rest of their world--out of it, or we'll all be listening to that opening voiceover from The Road Warrior in live Surround Sound.

But, he fears, there's just too many of them in charge who clearly don't know what the buck they're talking about.

Bunny buttresses:

"Credit Suisse faces first-quarter loss" by Simon Kennedy, Marketwatch, 3/20/08

"UBS enters ranks of record losers after $14 billion subprime write-down" by Warren Giles, Business Report, 1/30/08

"Mortgage crisis talks under way" by Chris Giles and Krishna Guha, Financial Times, 3/23/08

"What Created This Monster? by Nelson D. Schwarz and Julie Creswell, New York Times, 3/23/08

"What Went Wrong", Economist special report (pp.79-80), 3/22/08

"Natural History of the Rabbit (Oryctolagus Cuniculus), by Alexandra Sardi and Janelle Cooper,

http://www.baa.duke.edu/companat/BAA_289L_2004/Natural_History/Rabbit/rabbit_Natural_History.htm

3.16.08

O, to be blessed with an embarrassment of riches, chortles the bunny to himself.

Ordinarily, he doesn't like to think of himself as the sort that chortles, sniggers, or otherwise engages in gloating. A creature of the land, he is well versed in its gentry's mores.

But these are extraordinary times, and the getting's just too good. It's a bumper crop, a bounteous harvest of misery and woe and finger-pointing, with much of it being done exceptionally well. If pressed, he'd have to give the laurel wreath to Gretchen Morgenson in this morning's Times:

"But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street...Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A.R. Baron, clearing dubious stock trades. And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt.) It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there...As of February, according to Bloomberg data, 15% of those loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4%..." (p.1)

Great going, Gretch, cheers the bunny. Give it 'em good, by jingo!

Here's another, from Liz Rappaport and Justin Lahart in today's Journal:

"The US is at the recieivng end of a massive margin call...For years, the US economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer...The growing crisis of confidence now extends to the credit-worthiness of borowers across the spectrum--touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and the US government to rapidly repair the problems." (p.A1)

Marvelous stuff, isn't it? Give it up for Tom Cahill and Katherine Burton at Bloomberg last week:

"'If you have leverage, you're stuffed,' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back."

Bully for you, Bloombergers, rants the bunny. Rah, rah, sis-boom-bah, greedy bipeds all go BROKE BROKE BROKE!

The bunny does his best to keep his nose above politics, so it's not the fetid fumes from the national mudslinging contest nor state sex scandals (as if that would really roil a rabbit's equilibrium) that have gone to his head. Nay, this is karma in its terrible eternal majesty, the great circling of the cosmic clock. In a word: payback.

The Great Unwinding, as the bunny has come to think of it, is all atwirl like a streamer of firecrackers dangling from the fire escape of a Mott Street community center on the Lunar New Year. For years, the great pyramid of banks, brokerage firms, funds of all stripe and spot, Blackberry-toting businessmen and Joe Sixpacks alike have all spun to the same tune of Intangible Investing, AKA Spend What You Don't Have (perhaps taking their cues from their elected leaders). Then after dancing as fast as they could the music stopped, the markers were called in and lo, borrowing from Peter to pay Paul just didn't work when Paul showed up with his bros, a roll of electrical tape, two tire irons and a case of beer. (In a telling aside, casino revenues in Vegas are down almost 5%.) The panjandrums of Wall Street and Points Hedged clearly thought they would be immune to credit-borne pathogens, and now that their condition has progressed from symptomatic to full-blown, they have (predictably) become dependent on the Quick Fix handed out by Uncle Sam on the quarterly corner (or even a block or two away).

The mountain of leverage, like that of garbage in Naples, has come crashing down. Government intervention teamed with deep private pockets (J.P. Morgan, wherever he may be, must be greatly amused) can only prolong the inevitable reckoning. Those with debt-to-equity ratios too swollen from too many trips to the borrowing trough will be called to account. Once again the perils of cheap money are thrown into sharp relief, and the all-but-done rate cut coming this Tuesday won't help.

The bunny is a burrower. Now's as good a time as any to dig deep and wait out the carnage happening topside. Lest we forget, it's Tax Time.

Bunny Barrage:

"Rescue Me: A Fed Bailout Crosses a Line" by Gretchen Morgenson, New York Times, 3/16/08

"Debt Reckoning: US Recieves a Margin Call" by Liz Rappaport and Justin Lahart, Wall Street Journal, 3/16/08

"Hedge Funds Reel From Margin Calls Even on Treasuries (update 1)" by Tom Cahill and Katherine Burton, Bloomberg.com, 3/10/08

"One Ill Compounds Another, Hammering the Economy" by Vikas Bajaj, New York Times, 3/14/08

"Hedge Funds Squeezed As Lenders Get Tougher" by Carrick Mollenkamp and Serena Ng, Wall Street Journal 3/7/08

"Mortgage Fallout Exposes Holes in New Bank-Risk Rules" by Damian Paletta and Alistair MacDonald, Wall Street Journal, 3/4/08

"New Spasm Jolts Credit Markets" by Liz Rappaport, Joellen Perry and Deborah Lynn Blumberg, Wall Street Journal, 3/6/08

"Chips are down as Las Vegas feels pinch", ny Matthew Garrahan, Financial Times, 3/9/08

2.26.08

Ave, Jeffrey Robinson!

The bunny has been working the phones, trying to assuage the nagging suspicion that's been buzzing around his brain like a noisy gnat. He would much rather be getting familiar with his Tibetan cousin (Ochotona himalayana), but once again, humanity has driven him to distraction.

What's been driving the bunny batty lately is the rapid insinuation of sovereign wealth funds' capital into large financial institutions. It's not that SWFs are anything new (indeed, one early bird wormed out the fact that this vehicle's make dates at least to 1956), but the speed with which they have amassed container ships of cash for immediate injection into badly battered banks (can you stand all the alliteration?) without much need (nor, indeed, requirement) for oversight sets the bunny's incisors on edge. In fact, it's worrisome enough that Bob Davis at the Wall Street Journal got a front-page above-the-fold slot today for putting his finger on the swollen, throbbing problem at the heart of the matter:

"Executives from the world's largest SWF--the Abui Dhabi Investment Authority--and from the Government Investment Corp. of Singapore met Thursday with a US Treasury delegation led by the assistant secretary for international affairs, Clay Lowery. The talks are part of delicate global negotiations to draft rules to oversee the behavior of such funds, without discouraging them from investing in the US, Canada and Europe at a time of global financial turmoil."

The bunny would like to thank Mr. Davis for his deep visceral grasp of such a thorny obstruction. How does a UBS or a Citigroup, both of which have received massive capital transfusions from SWFs recently, respond when a simple request for transparency is met with a resounding "Hell, no" in various languages?

Mr. Davis is not alone in such sentiment. In the New York Times on 2/9, Steven Weisman wrote that "leaders of funds in Russia, the Middle East, China and other parts of Asia say that the West's demand for regulations is hypocritical in light of the failure to regulate European and American banks and hedge funds."

To be fair, some SWF captains have read the entrails and are acting accordingly. The China Investment Company (CIC) has gone out of its way to rise above the veil of secrecy for which SWFs are widely known, according to an article in the Financial Times by Andrew Wood on 2/4. Morgan Stanley, which rates CIC the sixth-largest SWF by assets (~$200 billion), was quoted in the same piece as predicting CIC would be the largest SWF by 2009.

Also, to be fair, the growth of SWFs can be tied directly to two factors--the astounding spike in oil and gas prices, and the massive accrual of savings, particularly in nations hardest hit by the Asian financial crisis of 1998. Neither one of these factors is illegal. And, in fact, the reversal of fortune displayed in the flow of capital from emerging back into established economies is, in the words of an Economist editorial from 1/19, "proof that capitalism works."

Ah, but is it? This is what bothers the bunny, and where the aforementioned Mr. Robinson comes in. This gentleman is the author of THE MERGER and THE LAUNDRYMEN, which chronicle (respectively) the mechanisms by which criminals optimize old-fashioned illegal moneymaking schemes in the modern age, and how they "wash" the proceeds through the digital economy to make "black" money "white". If 2% of assets traded worldwide are controlled by SWFs (this according to the Economist), Mr. Robinson notes that it is worth remembering that 2% of global GDP is black money. It therefore stands to reason that at least some of this black money would wash up in SWFs, though how much would be very difficult to quantify, not least because the fund managers probably cannot effectively document the origins of the money in their coffers themselves. So if some of the funds going into a UBS or Credit Suisse come from illegal drugs, or from the bodies of teenage prostitutes hooked on said drugs, or from the sales of guns sold to their pimps by rogue militas, what then? Mr. Robinson points out that while the US government claims jurisdiction over all financial crimes committed in US dollars (through the Treasury Department's Financial Crimes Enforcement Network, or FinCEN), it is in fact extremely difficult to enforce its own regulations across borders (case in point--BCCI).

Moreover, he points out that beyond the difficulties of auditing a foreign government, quantifying and qualifying its assets, and if necessary trying to impose a different government's set of rules...would you really want to? There is an estimated $7.5 trillion in offshore money today, he says, a good 10% of which is likely to be black money, mostly from drugs. If this kind of wealth were wiped out by a magic wand of uber-legislation, the ensuing wave of bankruptcies would likely usher in a new dark age.

This issue isn't going away anytime soon. The bunny will keep on digging, as is his nature.

(Emails to FinCEN at the US Treasury Department were not returned as of this writing.)


Begin at the beguining, bunny:

"The Invasion of the Sovereign Wealth Funds" (p.11) and "Asset-Backed Insecurity" (pp.78-80), The Economist, 1/19/08

"Asia Is Opening Up and Welcoming External Help" by Andrew Wood, Financial Times, 2/4/08

"Overseas Funds Resist Calls for a Code of Conduct" by Steven R. Weisman, New York Times, 2/9/08

"US Pushes Sovereign Funds to Open to Outside Scrutiny" by Bob Davis, Wall Street Journal, 2/26/08